Highlights of
Report Number: 2008-40-170 to the
Internal Revenue Service Commissioner for
the Wage and Investment Division.

IMPACT ON TAXPAYERS

Millions of taxpayers borrow against all or part of their expected tax
refunds to receive their money more quickly.This is accomplished through short-term loans that cost taxpayers fees
and interest payments.Many of these
taxpayers are eligible for free tax preparation services offered by the Internal
Revenue Service (IRS) and its partners.

WHY TIGTA DID THE AUDIT

This
audit was initiated to determine the impact Refund Anticipation Loans (RAL or
Loan) have on taxpayers and tax administration. A RAL is a short‑term loan based on a
taxpayer’s expected income tax refund and is a contract between the taxpayer
and a lender.The IRS is not involved in
this contract, cannot grant or deny the Loan, and cannot answer any questions
about it.The Loans are repaid directly
to the lender from the proceeds of the taxpayers’ tax refunds and last from 5 days
to 14 days.For Tax Years 2005–2007, the
number of Loans has remained at about 10 million.

WHAT
TIGTA FOUND

TIGTA conducted
a telephone survey of 350 taxpayers whose IRS tax records indicated that they
had received a RAL, and found most understood that they had received a
loan.Tax return preparers generally
explained they were receiving a loan but did not explain the interest rate.For the 250 respondents who indicated that
they had received RALs, 213 (85 percent) stated that they obtained their
Loans so they could more quickly receive their tax refunds.The other 100 indicated that they did not
obtain RALs despite what the IRS’ records indicated.For the 250 who responded that they received
RALs:

·131 (52 percent) received
their Loans the same day or within 2 business days.

·213 (85 percent)
stated that preparers made it clear they were receiving loans.In addition, 220 (88 percent) stated that the
preparers explained the fees.However,
only 85 respondents (34 percent) stated that they were provided the interest
rate for the Loans.

·167 (67 percent)
preparers explained how long it would take for the taxpayers to receive their
tax refunds if they chose not to obtain the Loans.

·213 (85 percent)
obtained Loans because they wanted faster access to their tax refunds, and 185
(74 percent) used the money to pay bills.Another 14 (6 percent) used the money to buy or repair a car or for home
repairs and expenses.Eight percent
stated that they put the money in savings.

The IRS is implementing a new
computer system that is expected to reduce the amount of time required to
process tax returns.By reducing the
number of days required to process tax returns, the IRS will be able to issue
tax refunds sooner.Tax returns for 45
(18 percent) of the 250 respondents were processed using the new computer
system.

An analysis of taxpayer
account data for the respondents showed that 158 (63 percent) received the Earned
Income Tax Credit.However, tax return
preparation and fees to obtain RALs ranged from 10 percent to 39 percent of the
taxpayers’ Earned Income Tax Credit, with the percentage generally higher for
low-income taxpayers.

The majority of respondents would
have qualified for the IRS’ free tax return preparation assistance.However, 81 percent (284 of 350) stated that
they were unaware of these free services.

WHAT TIGTA RECOMMENDED

TIGTA
recommended that the IRS use
taxpayer account data for taxpayers who apply for RALs and Refund Anticipation
Checks to better focus the IRS’ marketing and education efforts so that more
taxpayers can make use of the available free services. A Refund Anticipation Check is a non-loan
alternative to a RAL.

The IRS agreed with the recommendation.It plans to develop a plan to target
taxpayers who apply for RALs and Refund Anticipation Checks into its marketing
campaign for the 2009 Filing Season.The
plan will include an approach for reaching these taxpayers with key messages,
identifying the most effective approach, and determining the cost of this
effort.

READ THE
FULL REPORT

To view the report,
including the scope, methodology, and full IRS response, go to: